Long-term trend remains bullish

The market edged past the Nifty 10,500 mark and tested 10,550 before a small sell-off on Wednesday. This surge came after a low of 10,074 points in the morning when Gujarat election results were announced.

The current breakout confirms that the long trend remains bullish, going into 2018. The January settlement will be extremely important for two reasons. The first is, it will give us an inkling of foreign portfolio investors (FPI) attitude in what is a new financial year. The second reason is that the Budget on February 1, will start being discounted during this settlement.

By definition, the long-term and intermediate trends are up. Trend following signals suggest buying the Nifty with a stop at 10,350. The VIX has stabilised at lower levels but it is rising again. The rebound from 10,074 moved 4.5 per cent up to establish a pattern of higher highs.

The level to watch now is 10,550, that could be broken in one session if bullish sentiment persists. There should be support at around 10,400, and roughly every 50 points below that. The fundamentals of the economic recovery remain weak with higher inflation, a rising current account deficit, slow industrial recovery and continuing goods and services tax glitches and lower tax collections. 

FPIs have been net sellers in December. Their selling has been more than matched by domestic institutional buying. Retail sentiment seems to have recovered on the election results. Valuations are excessively high.

Traders must remain braced for currency volatility but a string of key central bank policy reviews indicated that status quo will be maintained as far as possible. As Brexit draws closer, the pound remains under pressure. The Bank of England maintains status quo but rising inflation could force a rate hike soon. The Federal Reserve has also set a schedule for hiking rates in 2018 and it is deleveraging its balance sheet. The Bank of Japan decided to hold status quo both in terms of its ongoing QE and its negative policy rates. The European Central Bank also held a negative policy rate and, although it has cut its QE quantum, it will maintain current QE levels until September 2018.

 

This bounce started from support at 9,675-9,700. The 200-Day Moving Average is around 9,750-9,800. In the longer-term, the Nifty moved North in December 2016 from 7,900 levels to a high of 10,550 in mid December 2017. The Index has bounced twice from 9,675 since December 2016.

The Nifty Bank rebounded less emphatically than the Nifty post-Gujarat Elections. The "Bank" is currently at 25,490 after falling from a high of 25,953 and bouncing from 24,620. A strangle of long January 25, 26,500c (59), long January 25, 24,500p (82) costs 141. This position is near zero-delta. It would take three big trending sessions in the next month for one side to be hit.

A trader could take this and sell short January 11, 26,500c (15), short January 11, 24,500p (21) to reduce net costs to 105, if the short strangle expires without being hit. This net long-short position could give a big payoff if the financial index stays volatile.

The Nifty’s put-call ratios are not so useful so long to expiry. The Nifty closed at 10,490 on Wednesday. A bullspread of long January 10,600c (98), short 10,700c (58) costs 40 and pays a maximum 60 and it's just 110 points from money. A bearspread of long January 10,400p (88), short 10,300p (64) costs 24, pays a maximum of 76 and is 90 points from money. The premium asymmetry indicates the upside trading bias.

A trader could “double-short sell” the far-from-money options (One long 10,600c, two short 10,700c; one long 10,400p, two short 10,300p) intending to close out the second short once there’s premium decay in the next two-three settlements.